Last week I just asked an investor that what the reason is for down trend of the stock market.
He easily replied me that it’s just because of CEC and he further said that he hates SEC and its regulators.Then he explained me why they are responsible for current down trend. According to him ASI should be at 10,000 by the end of this year and 13,000 by the end of the year 2012.But SEC wanted to stop this so they
introduced price band and when it wasn’t successful they introduced credit rules and further they allowed for big IPOs
without thinking market condition. Anyway now problem is solved and credit rules are subject to amend. When
notice is published on increased credit facility of Brokers, we can have good old days again. According to him
this is the good time to collect shares as market will start running sooner than later.
I think most of the investors are agreed with him looking the surface of the problem. In my opinion problem is neither
SEC nor it’s regulation. It’s a liquidity problem or in other words it’s due to lack of cash. It’s like USA property crisis
arises in 2008. At that time property values were increase by considerable percentage but finally they were bankrupted
since liquidity problem. In certain time of 2011, ASI had been up by 400% when compared to 2009. That means
Market Capitalization has been up by 4 times in other words it is increase from Rs 700 B to Rs 2,800 B.
For an example
Just think there is a Stock Market with 3 investors called A, B and C and 3 stocks called X, Y and Z. A have Rs 100,000
worth stock X parcel bought on cash basis and B also have Rs 100,000 Worth stock Y parcel bought on cash basis and
C also have Rs 100,000 worth stock Z parcel bought on cash basis. Accordingly there are Rs 300,000 cash in put at the
beginning whereas Market Capitalization also takes same figure. Now they start trading with each other like this.
A sell his X share parcel to B for Rs125,000 and use those sales proceed to buy Z share parcel from C for Rs 125,000.
Then C buys Y share parcel from B for Rs 125,000. At the end of the 1st round Market Capitalization is up by 75,000
to Rs 375,000 while cash position remaining same as Rs300,000. If people use their sales proceed to buy each parcels
without withdrawing money , this system can be continued unlimited times. If this happen 10 times , at the end of
the 10th time the market capitalization would be Rs 1,050,000 while remaining the cash position still at Rs 300,000.
That is how bubble/crash can create without credits. If one party withdraw their money without further buying, then
crisis starts and then others also get panic and try to withdraw their money by selling. This leads to stock market crash.
But if there is significant % of cash inflows to the system compared to the increase % of Market Capitalization ,this
may not lead to crash.
This is what happened in CSE over last 2 years. End of the September of 2010, MPI which is Blue Chip Index stood
at its peak level (7,800).At that time market capitalization had been increase by 4 times whereas Market PER was
above 25 level. Then foreigners decided that market was overvalued so they sold and exited the CSE. in the year 2011
there is Net Foreign Outflow of more than Rs 10Bn. At the same time some local Investors also withdrew money and
applied for IPOs. Further credit clearing was also helpful to create more active bears. Now market is with lack of
cash in other way there is a liquidity problem because Market Capitalization was increase by 4 times but Net Cash
Inflow takes minus figure. As a result of this there is huge selling pressure for Blue Chips. Since they take high weight
of Indexes, there should be huge cash inflows to buy Blue Chips to have a sustainable growth of Index. Since no one
enters cash to the CSE, people gave up the idea of Blue Chip and selected penny stocks and illiquid shares that can be
manipulated easily. After 2011 share manipulations highly dominated and PAP,LHCL,HVA,RGEM,AAIC are some of them. These manipulations could wash investors’ brains.
They laughed at the word “fundamentals” saying “Fun-da-mental”. Once there was a time in CSE (from 2011 Feb to July)
where there is a Negative relationship between ASI and MPI. That means ASI was going up whereas MPI was going
down. Ultimately now everyone is stuck with the market including manipulators. Even manipulators can’t now
manipulate their shares due to margin call.
Simply when there is no demand for blue chips, their prices are also going down. Since they
take significant weight of index, Manipulators can’t stop the Indexes going down by manipulating their lower
weighted shares. Then everything is going to disaster until we meet strong cash inflows to buy blue chips.
That means MPI /Blue Chips should start running to have sustainable growth. So we highly need foreign participation
or huge local cash investments to face such a high market capitalization (Rs2.2T). In my opinion foreigners may
not come to CSE until ASI is above 5,000 as Market PER (14) is still high for them to re enter. Therefore ASI is highly
probable to hit below 5,000 sooner than later due illiquidity of Blue Chips.
Q: Can we blame to SEC for over regulation (i.e. Price Band and Credit Rules)?
We should be thankful to SEC for making their best effort to reduce the gravity of crash even under varies influences.
As a result of this we still don’t say this is a crash. We could still say that this is only a down trend. SEC did it because
they knew the poor cash position of the stock market and they knew a crash/bubble can occur even at zero
credit level. If they didn’t do like that ASI would hit 10,000 or 12,000 and then would lead to Bangladesh type crash.
Anyway I wish they had unique policy on credit rules and had more regulations regarding IPO pricing method.
Q: Brokers Credit Facility is subject to amend by 3 times. Can we have good old days when rules are amended?
As I think people may not use this credit facility to buy Blue Chips like COMB,SAMP,DIST and on behalf of that they
may use credit to buy penny stocks and illiquid shares what they have already stuck since retailers are fully brain
washed as “Fundamentals don’t work here”. So credit increase may not be able to any significant impact to Indexes.
Further when people use credit to buy penny stocks and illiquid shares, crash may be worse than earlier. That’s why
the key persons of SEC resigned before it happen.
Q: What is the real solution for this problem?
Simply we need cash inflows for Blue Chips to make them liquid. Since local investors are suffering with lack of cash,
we highly need foreign inflows. It’s better if we could avoid foreign selling and exit. Expropriation Bill also adversely
affects to discourage foreign participation.CSE and Stock Brokers have to do more road shows in abroad to attract
them. Further manipulations should be controlled up to considerable level. There should be time gap among each
IPOs as well.
Q: What is the supportive level?
Down trend will further continue till CSE have cash inflows to buy Blue Chips. ASI at 5,000 may be supportive level only
if foreigners enter to CSE at that level. Otherwise we have to wait at any level (even 4,000) till they come to CSE.